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10 Home Buying Tips for 2010

The housing market, and with it, the mortgage landscape, have changed dramatically over the past two years.

Rules for scoring a low-interest mortgage have become stricter, and homebuyers must be savvy and well prepared to land any home loan. Below are 10 tips to make your homebuying and refinancing odyssey more successful in 2010.

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Tip 1

Consider an adjustable-rate mortgage.

In late 2009, one in 20 borrowers was obtaining adjustable-rate mortgages. As mortgage rates rise in 2010, the proportion of ARM borrowers is expected to grow.

The most popular adjustable is the 5/1 ARM, which carries an introductory rate that lasts five years, and then can change annually thereafter. Typically, the introductory rate on 5/1 ARM is lower than the rate on a 30-year fixed. That makes the 5/1 ARM a viable option for borrowers who are sure they will sell their homes within five or six years, before the monthly payments have a chance to skyrocket.

A fixed-rate mortgage is probably the safest option for homebuying. But for people who plan to sell their homes within a few years, a hybrid ARM is worth considering.

Tip 2Get your loan early in the year.

The Federal Reserve plans to stop buying mortgage-backed securities by the end of March. Most mortgage experts believe that rates will rise when mortgages go off Fed support as private investors require higher rates to compensate for the risk.

Tip 3Know your credit.

As the mortgage world goes back to basics, good deals require high credit scores. Until recently, it took a credit score of 720 or higher to get the best combination of fees and points. Now the best homebuying deals go to borrowers with credit scores of 740 or higher.

Tip 4Ask for three or four loan scenarios.

Instead of focusing only on the interest rate, consider more than two combinations of discount points and loan type.

Let’s say your best guess is that you’ll live in the house for eight years. Compare the total fees and monthly payments that you would make under three or four different loan deals. Ask yourself how much it would cost to pay zero discount points and get a higher rate compared to paying discount points in exchange for lower rates. What about a 5/1 or 7/1 ARM?

Tip 5Refinance for the remaining term.

When refinancing a 30-year mortgage, too many people start from the beginning again. When you refinance a 30-year loan that you’ve had for five years, pay off the new loan in 25 years. Just ask the lender to amortize the loan for the remaining period of the old loan.

Tip 6Know your numbers.

The housing boom busted more than three years ago, and still people are tempted to take on too much debt. Let the Federal Housing Administration be your guide for homebuying.

The FHA caps borrowers’ house payments at 31 percent of gross (pretax) monthly income. So, if you earn the median household income of $4,200 a month before taxes, your house payment, including principal, interest, taxes, insurance and association dues, should be no more than 31 percent of that, or $1,302. Some housing counselors say you should spend less — around 28 percent to 30 percent of gross income.

The FHA limits total debt payments to 43 percent of monthly income. Total debt payments include first and second mortgages, auto loans, credit cards and child support. Some non-FHA loans let you borrow more, but you don’t have to stretch.

“Expectations to grow into a payment ought to be scaled back until the economy is into a full recovery,” says Jim Sahnger, mortgage planner for Palm Beach Financial Network in Stuart, Fla.

Tip 7Small down payment? Go FHA.

Most lenders require buyers nowadays to make down payments of at least 10 percent. Similarly, most lenders require homeowners to have at least 10 percent equity to qualify for a low-rate refinance.

For people who don’t have the 10 percent, the FHA is an option. To get an FHA-insured mortgage, you need a down payment, or equity, of at least 3.5 percent.

Tip 8No down payment? Go VA or RHS.

The Department of Veterans Affairs guarantees no down payment mortgages in the VA Guaranteed Home Loan Program. To meet eligibility requirements you must provide proof of military service.

The U.S. Department of Agriculture’s Rural Housing Service doesn’t require down payments, either. The eligibility requirements include restrictions on income as well as property location.

Tip 9Check rates on jumbos.

Jumbo mortgages were a casualty of the credit crisis that began in the summer of 2007. Jumbo rates soared and remained high for more than two years. But at the end of 2007, rates on jumbo mortgages began falling. Toward the end of 2009, rates on fixed-rate, 30-year jumbos dropped to around 6 percent. Jumbo ARM rates also fell. For homeowners with at least 20 percent to 30 percent equity, refinancing is worth a look.

Tip 10If you fall behind, consult a counselor.

Delinquent borrowers who receive foreclosure counseling are 60 percent more likely to keep their homes than people who don’t get counseling, according to NeighborWorks America. They also are more likely to receive mortgage modifications and lower payments.

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